You can’t say that Trump didn’t warn us

By “us” I mean well connected GOP investors:

On the afternoon of Feb. 24, President Trump declared on Twitter that the coronavirus was “very much under control” in the United States, one of numerous rosy statements that he and his advisers made at the time about the worsening epidemic. He even added an observation for investors: “Stock market starting to look very good to me!”

But hours earlier, senior members of the president’s economic team, privately addressing board members of the conservative Hoover Institution, were less confident. Tomas J. Philipson, a senior economic adviser to the president, told the group he could not yet estimate the effects of the virus on the American economy. To some in the group, the implication was that an outbreak could prove worse than Mr. Philipson and other Trump administration advisers were signaling in public at the time.

The next day, board members — many of them Republican donors — got another taste of government uncertainty from Larry Kudlow, the director of the National Economic Council. Hours after he had boasted on CNBC that the virus was contained in the United States and “it’s pretty close to airtight,” Mr. Kudlow delivered a more ambiguous private message. He asserted that the virus was “contained in the U.S., to date, but now we just don’t know,”

. . .

To many of the investors who received or heard about the memo, it was the first significant sign of skepticism among Trump administration officials about their ability to contain the virus. It also provided a hint of the fallout that was to come, said one major investor who was briefed on it: the upending of daily life for the entire country.

“Short everything,” was the reaction of the investor, using the Wall Street term for betting on the idea that the stock prices of companies would soon fall.

Of course none of this is illegal:

[L]egal experts say . . . it is not apparent that any of the communications about the Hoover briefings violated securities laws. The Justice Department and the Securities and Exchange Commission would have several hurdles to clear before establishing that Appaloosa or other funds that received insights from Mr. Callanan, either directly or through intermediaries, acted improperly.

In America, the SEC focuses on finding witches. For instance, just imagine how they’d react if I gave investment advice in the blog—such as my opinion on Tesla stock. I call this a “witch hunt” because there is no scientific evidence that registered investment advisors can pick stocks better than a monkey. But actual government corruption? Nothing to see here — move right along.

PS. I feel a bit less stupid about all my previous stupid posts on society’s increasing stupidity, now that Tyler has dipped his toe in the water. (Yes, I know, linking isn’t endorsement.)

PPS. Speaking of stupidity, this caught my eye:

You’re the president,” Guthrie said. “You’re not like someone’s crazy uncle 

Trump’s not like someone’s crazy uncle? What kind of drug was she taking?

Treasury market bleg

Here’s Bloomberg:

The Treasury market is now so large that the U.S. central bank may have to continue to be involved to keep it functioning properly, according to Federal Reserve Vice Chair for Supervision Randal Quarles . . .

“It may be that there is a simple macro fact that the Treasury market being so much larger than it was even a few years ago, much larger than it was a decade ago and now really much larger than it was even a few years ago, that the sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there,” Quarles said.

In plain English, what does this mean? What is the bad thing that would happen in the Treasury market if the Fed did not intervene in times of stress? If that bad thing happened, would it create an easy profit opportunity for someone like me (an investor who can wait out periods of stress?)

Why does increased size make the Treasury market more fragile? One normally thinks in terms of size and liquidity being positively correlated. Is “stress” different from illiquidity?

Suppose the Fed intervened in the MBS market during times of stress in the T-bond market. Would that fail to address the problem? I.e., is the problem Treasury debt-specific, and not just a generalized lack of liquidity, (which can be addressed by adding more reserves?)

How does this problem relate to the “safe asset shortage” that people often discuss? Would addressing the safe asset shortage by issuing more T-bonds also make the Treasury market bigger and thus even more fragile?

PS. Just to be clear, Quarles does not seem to be discussing central bank support of government debt in the traditional sense, which meant intervening to keep government financing costs low. When the Fed injects more reserves into the system, they tend to pay interest on those reserves at a rate comparable to T-bill yields. Thus the Fed is not “monetizing the debt” in the original meaning of the phrase.

Robert Hetzel and the risks of inflation

Here’s the abstract of Robert Hetzel’s new Mercatus paper, which discusses the Fed’s response to Covid-19:

The quantity theory, which posits a causal relationship between money and prices, is among the oldest theories in economics. Starting in March 2020 as the COVID-19 pandemic affected the United States, money surged at a historically rapid pace. Historical experience, most recently with the Great Inflation of the mid-1960s through the 1970s, suggests that an uncontrolled surge in inflation is coming. Other factors in the intellectual and political environment are also reminiscent of the Great Inflation. The Federal Reserve has reverted to its 1950s “cost and availability” view of monetary transmission. There also exists a widespread belief that inflation is a nonmonetary phenomenon. In Keynesian terms, because the Phillips curve, which relates inflation and unemployment, is presumed to be flat, the Fed can push the unemployment rate to historically low levels. Federal Open Market Committee (FOMC) chair Jerome Powell asserts that the course of the recovery will be dictated by the behavior of the virus. That makes sense in that the recession arose as a shock to potential output. Powell and the FOMC, however, treat the recession as if it originated in a large negative aggregate-demand shock requiring extremely stimulative monetary policy. The FOMC should follow a rule that ensures that the spring 2020 bulge in money dissipates.

The paper presents a monetarist critique of recent Fed policy.

I’m less worried about inflation, as you don’t see high inflation expectations in the TIPS markets. But Bob is right that the intellectual climate increasingly resembles the 1960s, when belief in a (flawed) Keynesian model led to some serious policy errors. So this is certainly something to keep an eye on.

China’s losing the soft power war

While China avoided losing its trade war with America, it is shooting itself in the foot when it comes to the war of ideas.

China recently resumed broadcasting NBA games, after a long hiatus sparked by an obscure tweet by an official who works for the Houston Rockets.

If China had not responded, no one would have paid any attention to the tweet on Hong Kong. After their hysterical overreaction, the international news media focused even more attention on China’s crackdown in Hong Kong. Not only did China look bad for its actions in Hong Kong, now it also looked bad for trying to squelch free speech in the US. Even if China were to win a limited victory by pressuring a specific group to remain silent, they lose far more by triggering much more negative commentary by the broader international community.

China uses these tactics against many countries. In the end, the Chinese government generally caves in and ends their boycotts. But the price is a steady erosion in public support throughout the world. Polls show that the public in many countries has shifted toward a much less favorable view of China in recent years. Xi’s policy is not working.

I don’t know whether this policy was Xi Jinping’s idea, or if he was advised by people in the Chinese government. But the attempt to pressure foreign countries has backfired badly, and China is losing the soft power war.

When countries do things that are clearly not in their interest, many people look for some sort of rational explanation, some sort of sophisticated and subtle strategy at work. As I’ve gotten older, I’ve come to realize that even great power governments are not very smart. If a country is acting foolishly, the simplest explanation is that its government made a mistake.

Banana republic watch

Yes, I know, I’m just being hysterical:

President Donald Trump’s order to his secretary of state to declassify thousands of Hillary Clinton’s emails, along with his insistence that his attorney general issue indictments against Barack Obama and Joe Biden, takes his presidency into new territory — until now, occupied by leaders with names like Putin, Xi and Erdogan.

Trump has long demanded — quite publicly, often on Twitter — that his most senior cabinet members use the power of their office to pursue political enemies. But his appeals this week, as he trailed badly in the polls and was desperate to turn the national conversation away from the coronavirus, were so blatant that one had to look to authoritarian nations to make comparisons.

He took a step even Richard Nixon avoided in his most desperate days: openly ordering direct immediate government action against specific opponents, timed to serve his reelection campaign.

BTW, the Democratic Party’s flirtation with court-packing is also banana republicanism. But the unique awfulness of Trump has overshadowed that scandal. (And yes, the GOP is partly to blame–they behaved disgracefully in holding up a nomination in 2016.)

PS. Go Jaime Harrison!

Off topic: I took the NYT language/location test, and this is where they predicted I’m from:

Correct answer is Madison. But then just one of the 25 questions could have produced this map. Can you guess which one?